A continuous-time hidden Markov model for mean-variance portfolio optimization

Author

Elliott, Robert J. ; Tak Kuen Siu

Author_Institution

Haskayne Sch. of Bus., Univ. of Calgary, Calgary, AB, Canada

fYear

2009

fDate

24-27 May 2009

Firstpage

1189

Lastpage

1192

Abstract

We study a mean-variance portfolio selection problem under a hidden Markov regime-switching Black-Scholes-Merton economy with parameter uncertainty. By exploiting the separation principle, we solve the mean-variance portfolio selection problem and the filtering/estimation problem separately. An explicit solution to the mean-variance problem is derived using the stochastic maximum principle. Robust filters of the chain and robust-based EM algorithm for unknown model parameters are developed.

Keywords

expectation-maximisation algorithm; filtering theory; hidden Markov models; optimisation; stochastic processes; continuous-time hidden Markov model; filtering-estimation problem; hidden Markov regime-switching Black-Scholes-Merton economy; mean-variance portfolio optimization; parameter uncertainty; robust filters; robust-based EM algorithm; separation principle; stochastic maximum principle; Econometrics; Economics; Filtering; Filters; Finance; Hidden Markov models; Portfolios; Robustness; Security; Stochastic processes;

fLanguage

English

Publisher

ieee

Conference_Titel

Circuits and Systems, 2009. ISCAS 2009. IEEE International Symposium on

Conference_Location

Taipei

Print_ISBN

978-1-4244-3827-3

Electronic_ISBN

978-1-4244-3828-0

Type

conf

DOI

10.1109/ISCAS.2009.5117974

Filename

5117974